Rating Rationale
January 29, 2018 | Mumbai
L&T Technology Services Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.250 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of L&T Technology Services Ltd (LTTS).

The ratings continue to reflect the strong managerial, operational, and financial support from parent, Larsen and Toubro Ltd (L&T; 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), presence in niche service lines and industries with healthy growth prospects, and strong financial risk profile. These strengths are partially offset by modest scale of operations and geographical concentration in revenue profile.

Analytical Approach

* CRISIL has amortised the goodwill arising from LTTS's acquisition of the product engineering services (PES) vertical over 10 years.
 
* CRISIL has also factored in operational and financial support available to LTTS from its parent, Larsen and Toubro Ltd (L&T; 'CRISIL AAA/FAAA/Stable/CRISIL A1+').

Key Rating Drivers & Detailed Description
Strengths
* Strong managerial, operational, and financial support from L&T
LTTS is a subsidiary of L&T from which it derives strong managerial, operational, and financial support. There is commonality in the board of directors and entire operational teams for these units have moved as part of the strategic business unit (SBU) to LTTS. L&T had invested Rs 750 crore in the form of preference shares in LTTS in addition to Rs 300 crore of equity share capital for the buyout of these SBUs. The 10% preference shares (redeemable at par) subscribed by L&T were converted into equity in May 2016, and the company was listed in September 2016.
 
LTTS benefits from L&T's established position as an engineering specialist, given that LTTS target market is engineering design. Operational support is available to LTTS from L&T in the form of shared resources, largely infrastructure such as office space and talent.
 
* Presence in niche service lines and industries with healthy growth prospects
LTTS has presence in engineering and R&D services, which are relatively new segments, holding significant opportunity for the Indian IT and IT-enabled services (ITES) sectors. The past few years have witnessed growing interest from clients across sectors (including telecommunications, automotive, aerospace, industrial products, and heavy machinery, construction, and consumer appliances) in sourcing their engineering and R&D requirements from India.
 
* Strong financial risk profile
Financial risk profile is expected to remain comfortable, backed by healthy gearing and debt protection metrics, strong net cash accrual, and absence of debt obligation or debt-funded capital expenditure (capex) over the medium term. LTTS has no long-term debt. Since the 10% preference shares (redeemable at par) subscribed by L&T were converted into equity in May 2016, the company has no redemption obligation against the same in future.
 
Gearing is likely to be below 0.02 time over the medium term because of healthy accretion to reserve and absence of large acquisitions or capex. Debt protection metrics may also remain strong despite a dividend payout (inclusive of dividend distribution tax) of over 50% profit after tax (PAT) to L&T, given the strong accrual expected over the medium term.
 
Weakness
* Modest scale of operations
LTTS is a medium-sized Tier-II player in the Indian software industry with operating income of Rs 3113 crore in fiscal 2017. The company has a size disadvantage vis-a -vis larger players in the industry (where scale of operations largely determines ability to bid for large orders successfully).
 
* Geographical concentration in revenue profile
Dependence on the US market is high, with around 60% of the revenue coming from the US in fiscal 2017. Although geographical diversity mitigates business risk, skew in revenue is unavoidable given that US is the largest IT spender in the world and accounts for over 60% of the industry's total revenue.
Outlook: Stable

CRISIL believes LTTS will continue to receive managerial, technical, and financial support from L&T. Business risk profile will be supported by healthy growth in engineering and research & development (R&D-related information technology (IT) services, and financial risk profile will remain comfortable in the absence of debt-funded capex.
 
Upside scenario
* More-than-anticipated growth in operating revenue and profitability
* Increase in scale of operations, and sustained financial risk profile
 
Downside scenario
* Large, debt-funded acquisition or capex adversely impacting debt protection metrics
* Decline in revenue and operating profitability
* Volatility in foreign exchange rates

About the Company

LTTS is an engineering services provider incorporated in 2012 and offers innovative design and development solutions across the product development value chain to the industrial products, transportation, aerospace, telecommunications (telecom), and process industries. As on December 31, 2017, L&T holds 89.77% shares of LTTS, which was reduced from 100% at the time of initial public offering in September 2016.
 
The company was created by combining two strategic business units: Product Engineering Service PES from L&T Infotech Ltd ('CRISIL AA+/Stable/CRISIL A1+'; 100% subsidiary of L&T) and integrated engineering services (IES) from L&T, which were transferred to it on January 1, 2014, and April 1, 2014, respectively.
 
For the nine months ended December 31, 2017, revenue was Rs 2555 crore and PAT Rs 341 crore, against Rs 2387 crore and Rs 356 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators^
As on/for the period ended March 31,   2017 2016
Revenue Rs. crore 3,121 2,899
Profit after tax Rs. crore 411 398
PAT margin % 13.2 13.7
Adjusted debt/adjusted net worth Times NA 0.11
Interest coverage Times 60.72 8.03
^ CRISIL adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon Rate (%) Maturity Date Issue size
(Rs. Cr.)		 Rating assigned
with outlook
NA Fund-Based Facilities* NA NA NA 200 CRISIL AA+/Stable
NA Non-Fund Based Limit** NA NA NA 50 CRISIL A1+
*Fund Based ' Cash Credit / Packing Credit (does not include term loan)
**Non Fund Based ' Letter of Credit / Bank Guarantee
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  200  CRISIL AA+/Stable    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL AA+/Stable 
Non Fund-based Bank Facilities  LT/ST  50  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities* 200 CRISIL AA+/Stable Fund-Based Facilities* 200 CRISIL AA+/Stable
Non-Fund Based Limit** 50 CRISIL A1+ Non-Fund Based Limit** 50 CRISIL A1+
Total 250 -- Total 250 --
*Fund-based - cash credit/packing credit (does not include term loan)
**non-fund-based ' letter of credit/bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Software Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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